Why Disney Abandoned Video Games

Summary

Disney Interactive is dead.

This is the right move long term.

Disney can now focus on its core competency and license its IP more effectively.

Introduction

The portfolio of characters and content that Disney (NYSE:DIS) owns is formidable. Video games seem like such an obvious way to channel IP into massive amounts of dollars. It seems it should be easy to succeed with the entire Pixar, Marvel, and Star Wars universe at your fingertips. Slap together a game and launch it with the movie, and the money should flow in, right? Copy the Skylanders (NASDAQ:ATVI) business model with Disney IP, and the kids will go crazy, right?

Bob Iger said during the investor call that "... we're better off managing the risk that the business delivers by licensing instead of publishing." I couldn't help but wonder why that statement was made. Disney has an incredibly successful movie studio, and the translation into video games should be easy, right? Development of a modern video game should be in the sweet spot for the company that owns Pixar, and yet, after ten years of effort, Disney has opened and then closed 6 game studios. None of the games published by Disney Interactive achieved massive success on par with a Call of Duty or Super Mario game. Good video games are hard to make.

Video Game Development != Movie Development

It is important to understand that video games are not like other forms of media. The skill set required to develop a film or TV show is not the same as those required for the development of a video game. Game design incorporates system architecture, risk/reward structuring, the development of player agency, and an understanding of what constitutes fun gameplay. There is less control over narrative and story. Character development is important, but not typically the main focus as in film.

Sure, there are some synergies to the process, but just because a company is good at one form of media does not mean it is good at ALL forms of media. Look at any licensed movie-based video game in the past 20 years, if you are skeptical. Only a small handful have actually been well received by the gaming audience, even when the source material is a blockbuster movie. Conversely, look at the early reviews of the Warcraft movie or any film based on a video game (Hitman, Prince of Persia, etc.) to see how generally badly those have translated to the big screen. The two forms of media are not directly translatable.

What happened, and why should shareholders care?

The post-mortem of the Disney video game saga is not fully understood. My initial impression is that hubris and overdiversification are the culprits. Anecdotal accounts from former employees will be our best chance to understand what happened. It will be several years before we know the full story, and for now, the decision represents a $147 million write-off and a strategic shift to licensing instead of content creation. Does this decision really indicate a destruction of shareholder value as Daniel Jones mentioned in his article here?

This piece from Tech Insider suggests that the core issue was Disney's risk aversion and unwillingness to make the full investment required to be successful in the video game industry. A lack of predictability as regards future ROI caused rash decisions via spreadsheets rather than a focus on product design and gameplay. Games were started, and then management would spook and kill the fledgling game before it could fully materialize. Studio priorities were shifted rapidly from AAA games to free-to-play to mobile, with no clear strategic vision. These are all clear indications that the company simply did not understand video game development.

The bureaucracy of Disney was stifling and inflexible. Red tape was piled onto projects from all sides, and internal license owners fought over the usage of their IP. In the end, it was clear - just because a company knows movies and TV does not mean it understands video games. A fundamental lack of institutional knowledge killed the Disney video game effort. The half steps and lack of commitment doomed it to failure.

This is an important view into the inner workings of DIS for a shareholder. Can the company innovate and shift into new markets? Are there deeper issues at DIS we should be concerned about?

The Future for Disney Content in Games

I'm a long-time DIS shareholder and a big fan of the company. I'm actually okay with the decision to shut down the games business and generally agree with the move. Game development is not a core skill set of Disney, and served more as a distraction than anything beneficial. The focus on licensing will allow DIS to earn a return on its IP by way of creative partnerships with very little risk. If the "toys-to-life" market continues to drop, this move actually could be very forward-looking, while the Skylanders ship continues to sink.

DIS can partner with former competitors and arrange favorable licensing deals without having to invest in development or publishing. Imagine DIS characters in Skylanders or as Nintendo (OTCPK:NTDOY) Amiibo as an example of what could be possible. Contracted development of licensed products will continue, although gamers have historically seen through the obvious cash-grab "games based on a movie".

This decision allows Disney to spend its resources on its core competency - creating interesting stories and characters, and then capitalizing on the IP. I would much prefer the company invest its cash into new Pixar and Star Wars movies or new rides at Disney World than build more video games. It is also important to remember that there are plenty of game developers who will happily pay tens of millions of dollars in licensing costs and royalties to use Disney IP. The games these licensees produce stand a better chance to find success and represent a much safer channel to market for the company.

I remain long DIS.

Disclosure:I am/we are long DIS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.